By Steven Draper, FSA, MAAA, Consulting Actuary, and Ron Cornwell, FSA, MAAA, Principal and Consulting Actuary, Milliman
From the perspective of an employer health plan sponsor, these words could have been written anytime in the past five years and still be fairly accurate. Employers have been struggling with high cost increases for some time. Annual premiums for a family of four have increased from $9,135 in 2002 to $14,330 in 2007, with annual increases of 10% or more in some years.
For the employee-consumer, their average annual medical cost for a family of four increased by 8.4% from 2006 to 2007.
What can be done to counteract these rising costs? Annual changes to health benefit plans, along with more significant changes every three to four years, can lead to significant reductions in the annual cost increases borne by employers. These changes can also lead to increased employee appreciation for their health benefits.
Many people subscribe to the theory of “if it ain’t broke, don’t fix it.” This can be a good philosophy in some cases, but not when it comes to managing health care costs in the current environment.
In today’s constantly evolving health care benefits arena, a better maxim would be “a stitch in time saves nine.” If you’re not on top of the trends and monitoring and adjusting your plan every year, you’re going to lose ground.
Belated efforts to catch up will require far more effort and prove more wrenching than small changes made annually. Making at least some modification to the plan every year keeps the lines of communication open with your employees. If you provide nothing but a box for employees to check to keep the plan the same as it was, you are missing an opportunity to highlight cost-saving benefits.
Making a few changes every year gives employees a real reason to read the open enrollment materials thoroughly, and allows you to remind them of useful and cost-effective benefits of which they may not be fully aware.
For example, reminding employees about 24-hour nurse hotlines can lead to employees using services that prove to be both more efficient for them and their families—and less expensive for the employer—than either doctor or emergency room visits.
Plan sponsors also should consider making substantial changes to the plan every three or four years, up to and including a change in the insurance company vendor.
Many employers are happy with their vendors and have good relationships with them, which causes a reluctance to shop around. But it is best not to get locked into an agreement with any one provider for a term longer than three years.
There is a lot of competition in the insurance industry and much incentive on the part of insurance companies and administrators to compete for your business. Even if you end up keeping vendors, the terms of your agreement likely will be much more favorable than your past contract due to increased competition.
Shopping around can be particularly beneficial for self-funded plans; the savings can add up quickly. If renegotiation of the contract saves even $5 per employee in monthly fees, an employer with 10,000 participants would see savings of $600,000 a year.
In addition, insurance company contracts with hospitals and physicians are constantly changing. Over time, provider networks evolve as hospitals and physician groups are added and others are removed from the network. If by the end of your contract, a key provider such as a children’s hospital is no longer in-network, a change may be necessary to improve employee satisfaction.
Experience also shows that claims during the first month or two of a new plan provided by a new vendor can be much lower than expected—up to 1/3 lower in some cases during the first month. No one knows exactly why this is so, but one possible explanation is that the new plan administrator brings with it new rules that may include new providers, new copays, and cost sharing. It takes one to two months for employees to become familiar with the specifics of the new plan. This may discourage non-essential claims or claims for elective procedures not immediately necessary. These are incremental savings that can aggregate over the life of a three-year contract and lead to measurably lower costs overall.
In addition to making regular changes large and small, it is important to find new and innovative ways to control costs. Annually reviewing reports like the MMI—which tell you how much costs have risen and break them down by health care component and geographic area—can be helpful in understanding current health benefit cost trends.
These kinds of tools won’t tell you what to do, but they can point you in the right direction and help you understand the drivers of increased health care spending. The pharmacy component of the MMI provides an example. These costs have been declining in recent years as doctors and consumers have switched to generic alternatives, and as patents expire for popular name-brand drugs.
Although pharmacy cost trends have been decreasing overall, trends are higher for specialty medicines—high-end biologics and injectable therapies that can cost many thousands of dollars per patient. Currently these drugs comprise only 5% to 6% of the cost of the pharmacy benefits (based on the MMI), but they are destined to become a larger share and drive aggregate health care costs higher.
Most pharmacy plans work on three-tier systems, with increasing copays for generic, preferred brand, and non-preferred brand drugs. If you haven’t done so already, you may want to consider adding a fourth tier with an even higher copay for some of these very expensive specialty drugs and injectable therapies.
Of course you want your plan participants to select generic drugs when appropriate, but there are widely different price levels even within the subcategory of generics. In fact, one out of every five retail generic prescriptions costs more than $70. You might consider offering a $5 copay for all generics priced less than a benchmark such as $50 or $70, while retaining the customary $10 copay for the more expensive drugs. Another possibility is moving to 20% coinsurance for the more expensive generics.
Use annual open enrollment materials to communicate the value of benefit plans as well as encourage healthy lifestyles and appropriate use of health care.
By explaining changes to benefits that affect them and their families, you may gain a greater hold on employees’ attention. In any event, you’ll have a larger, more attentive audience for your communications materials than if employees need do nothing to keep their plans exactly the same as before.
Active management of your plan, combined with effective employee communications and a continuous search for new and innovative ways to encourage cost-effective decisions by participants, will help you increase employee satisfaction and save your company as much money as possible in the years ahead.
Despite rising costs, you can ensure that your most costly benefits remain an effective tool for attracting and retaining the best employees without exhausting all of your compensation dollars.
